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It is becoming increasingly apparent that Cambridge industrial Trust (CIT) made a grave miscalculation in its pursuit of its rival, MacarthurCook Industrial REIT (Ml-REIT). On Nov 6, CIT spent some $10 million to acquire a 9.78% stake in MI-REIT, triggering speculation in the market that it was preparing for some kind of merger or acquisition that would significantly increase its size and heft. Ml-REIT had announced a recapitalisation plan that same day, which had its own shareholders up in arms because of the massive dilution they would suffer. So, it seemed entirely possible that CIT might succeed in winning widespread support from MI-REIT investors if it came up with a more palatable alternative for them.
It wasn't long, however, before CIT and its management company, Cambridge Industrial Trust Management (CITM), began to backtrack on the whole idea. Instead of a merger, it became clear that CIT wanted to use the units it had acquired in MI-REIT to vote down the latter's recapitalisation plan and replace its manager with CITM. As manager of the two REITs, CITM said it would be in a position to use its enlarged pool of assets to better support both sets of investors.
But, that immediately raised a number of troubling questions. Is it appropriate for CIT to use its resources to wrest control of MI-REIT for the benefit of CITM? Would CIT's resources be used next to bail out investors in MI-REIT? And, wouldn't CITM face a serious conflict of interest managing two RElTs that invest in industrial properties?
Late last week, the Monetary Authority of Singapore (MAS) stepped in. In a statement on Nov 20, CITM said the MAS would not approve of its appointment as manager of MI-REIT, in view of potential conflicts of interest. CITM also conceded that the only proposals it was considering were contingent upon it being appointed manager of MI-REIT. CIT nevertheless, still intends to vote against MI-REIT’s recapitalisation plan, when a meeting to consider the proposal is held this Monday.
That leaves CIT in a difficult position. If MI-REIT's recapitalisation is approved, CIT will have to fork out more money to avoid suffering a dilution in its investment. And, in effect, its money will be used to help turn around a RElT that will then go on to compete with it for industrial property assets. On the other hand, if it succeeds in scuppering the recapitalisation plan, it could risk seeing the value of its investment in MI-REIT shrivel, as the pressure of its financial obligations mounts. MI-REIT is committed to acquiring an unfunded industrial property for nearly $91 million and refinancing almost $225 million of debt by year-end.
CIT itself doesn't face any debt refinancing pressure until 2012. But, it isn't exactly flush with cash, either. In July, the trust raised $28 million through a placement of 71 million shares at 38.2 cents apiece. CITM had also stated its intention of disposing its non-core properties. As at end-September, CIT had a debt-to-asset gearing of 43 %. In 3Q2009, CIT achieved net property income of $16.4 million, up 2.85% y-o-y. Its distribution per unit for the quarter was 1.34 cents, or an annualised 5.33 cents, down 1.2% y-o-y.
The reaction to CIT's hostile pursuit of MI-REIT has been mixed, In a report last week, JPMorgan characterised it as a positive development for the local REIT scene. Since the introduction of the Singapore Code on Takeovers and Mergers in June 2007, all the takeovers have been friendly, JPMorgan notes. "While there are still several milestones for both parties to reach in this [MI-REIT] transaction, no matter the actual outcome, this latest development, which could potentially extend into a hostile takeover situation, is a positive development for the sector, in our view."
Other analysts say it underscores why investors ought to stick with the biggest and best-run of the REITs in the market. CIT was the first REIT to hit the market without the backing of a large property development group committed to providing it with a pipeline of assets for growth. As a result, it traded at a discount to REITs in the CapitaLand and Ascendas stables. Its ill-considered pursuit of MI-REIT seems unlikely to enhance it, popularity much. In fact, Jonathan Koh, an analyst at UOB KayHian who no longer covers CIT, suggests that investors looking for exposure to industrial properties ought to simply buy shares in Ascendas REIT.
Investors willing to look beyond the industrial properties could buy retail-property REIT CapitaMall Trust or office-property REIT CapitaCommercial Trust, both linked to CapitaLand. While these well-established REITs offer relatively low distribution yields, it is largely a reflection of the market's confidence that they will stick to their stated strategy. And, they usually look before they leap at any investment opportunity. That is something CIT and its manager would do well to learn.
Did Cambridge Industrial Trust look before it leaped?
